What Every In-House Counsel Should Know About
Corporate Governance Developments and Other
Highlights under the Dodd-Frank Wall Street Reform
and Consumer Protection Act
Presentation to
The North Florida Chapter
Association of Corporate Counsel
September 14, 2010
Dodd-Frank Wall Street Reform and
Consumer Protection Act
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On July 21, 2010, President Obama signed into law the
Dodd-Frank Wall Street Reform and Consumer
Protection Act (Act).
The Act primarily addresses the overhaul of the national
financial regulatory regime, but also contains corporate
governance, executive compensation, disclosure, and
other provisions that apply to public companies
generally.
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Dodd-Frank Wall Street Reform and
Consumer Protection Act
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This presentation will focus on those provisions that are
generally applicable to public companies, which most
notably include:
– Providing the SEC with authority to implement proxy access
– Mandating shareholder advisory votes on executive
compensation and “golden parachutes”
– Enhancing compensation committee and adviser independence
requirements
– Mandating executive compensation clawbacks
– Increasing compensation and governance related disclosure in
proxy statements
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Dodd-Frank Provisions That Are Not
Being Addressed
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Financial Stability Oversight Council
Increased Authority for the Federal Reserve over BHCs
and nonbank financial companies
FDIC’s Orderly Liquidation Authority for large failing
financial institutions
Regulation of Derivatives
Regulation of Advisers to Private Funds (Hedge Funds)
Creation of Federal Insurance Office
Bureau of Consumer Financial Protection
And many others
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Regulation D
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Definition of “Accredited Investor” has been slightly
changed. The minimum net worth standard for
accredited investors as that term applies to natural
persons has been changed to eliminate the primary
residence from the net-worth calculation.
To the extent an investor is underwater, the liability in
excess of the value of the primary residence is factored
into the minimum net-worth calculation.
Second homes still count toward net-worth.
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Regulation D (con’t)
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July 21, 2011 – SEC is required to look at other
Accredited Investor standards for natural persons.
2014 – Another review of Accredited Investor definition
and then periodic reviews every 4 years.
No grandfathering for offerings that began before July
21, 2010, but had not yet closed.
Bad boy pensions for rule 505 offerings will apply to
Rule 506 offerings once SEC issues rules.
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Exemption from SOX Internal
Controls Attestation Requirements
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Act permanently exempts companies that are neither
“large accelerated filers” nor “accelerated filers” from
SOX Section 404(b) requirement to have the external
auditor attest to internal control over financial reporting
Act also requires SEC to conduct a study to determine
how SEC could reduce the burden of complying with
SOX Section 404(b) for companies whose market
capitalization is between $75 million and $250 million
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Shorter Reporting Deadlines
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SEC is permitted to shorten the 10-day reporting periods
for:
– Form 3 under Section 16
– Schedules 13D and 13G.
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Proxy Access
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August 25, 2010 – SEC adopted proxy access rules as
permitted by the Act.
“Proxy access” refers to the ability of shareholders to
include their director nominees in the company’s proxy
materials.
Shareholders must own 3% of a company’s voting stock
for 3 years in order to submit a nominee.
Maximum number of directors that can be submitted is
the greater of one or 25% of the entire board. If multiple
shareholders submit nominees, nominees from largest
shareholders will be accepted.
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Proxy Access (con’t)
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Shareholders must certify that they have no intent to
control.
Shareholder nominee must be described in a new
Schedule 14N. A company is not responsible for any
information provided by the shareholders.
Shareholder nominations are required to be given to a
company at least 120 days before the first anniversary
date of the company’s proxy statement in the prior year.
Application of Proxy Access to smaller reporting
companies is delayed for three years.
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Proxy Access (con’t)
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Company Action Items:
– Review and revise advance notice bylaw provisions to
work with SEC rules
– Review and revise director nomination procedures in
nominating and governance committee charter and
corporate governance principles to work with SEC rules
– Be proactive in communicating with large shareholders
and understanding their concerns
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“Say on Pay” Vote on Executive
Compensation
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Act requires companies to include in any proxy
statement requiring compensation disclosure a separate
resolution subject to an advisory shareholder vote on the
compensation of named executive officers (CEO, CFO
and three other most highly compensated executive
officers)
– Effective for shareholder meetings occurring after January
21, 2011 (six months after enactment)
– Vote must be held at least once every three years, with
frequency determined by separate shareholder vote
– Vote is non-binding and will not be construed to:
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Overrule any board or company decision;
Create or imply any change or addition to the fiduciary duty of the
board or the company; or
Restrict or limit shareholder proposals relating to executive
compensation
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“Say When on Pay” Vote
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“Say on pay” vote must be held at least once every three
years
Whether “say on pay” vote is held every one, two or
three years must be included as separate resolution
subject to shareholder vote in proxy statement for first
annual shareholder meeting occurring after January 21,
2011
Vote on frequency of “say on pay” must reoccur at least
once every six years
Act does not address what voting standard applies to
“say when on pay” vote (i.e., plurality or majority)
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“Say on Pay” Vote
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Although the “say on pay” requirement is self-executing,
it is likely that the SEC will issue rules on this topic
– Current SEC rules would require all companies to file a
preliminary proxy statement ten days before the filing of
the definitive proxy statement
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SEC eliminated this requirement for TARP companies
required to hold “say on pay” votes
– SEC proxy card rules only permit “for,” “against” or
“abstain” votes and don’t contemplate one, two or three
years for “say when on pay” vote
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“Say on Pay” Vote (con’t)
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Company Action Items:
– Be proactive with shareholders in justifying executive compensation
– Revisit proxy statement CD&A disclosure in light of “say on pay”
vote
– Review company’s position with respect to hot button compensation
issues for institutional investors and proxy advisory firms
– Review executive compensation programs for elements that may
be controversial to shareholders
– Consider changes to proxy statement preparation timetable,
particularly if preliminary proxy statement is required
– Review and revise compensation committee charter to consider
“say on pay” vote
– Consider desired frequency of “say on pay” vote
– Review and revise bylaws to permit voting standard used for “say
when on pay” vote
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Shareholder Approval of Golden
Parachute Compensation
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Act requires proxy materials for shareholder meetings
occurring after January 21, 2011 for the purpose of
approving an acquisition, merger, consolidation, or
proposed disposition of all or substantially all the assets
of the company to include:
– Disclosure of any golden parachute agreement with any named
executive officer of the company (or of the acquirer) concerning
any compensation based on or otherwise related to the business
combination being voted on;
– Disclosure of the aggregate total of all golden parachute
compensation that may be paid to such named executive officer
and the conditions under which it may be paid or become
payable; and
– A separate resolution subject to shareholder vote to approve the
disclosed agreements and compensation
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Shareholder Approval of Golden
Parachute Compensation (con’t)
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Disclosure
– Requires disclosure of present, deferred and contingent
compensation
– Disclosure must be in clear and simple form in accordance with
SEC rules
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No deadline is set by the Act for the SEC to issue rules
Shareholder vote
– Vote not required if agreements have been subject to a “say on
pay” vote
– Vote is non-binding and will not be construed to overrule any
board or company decision, create or imply any change or
addition to the fiduciary duty of the board or the company, or
restrict or limit shareholder proposals relating to executive
compensation
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Prohibition on Broker Discretionary
Voting
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Act requires exchanges to prohibit discretionary broker voting for
the election of directors, executive compensation, or other
significant matters (to be determined by SEC rule) unless
beneficial owner has instructed broker how to vote
– Amendment effective immediately
– 2009 amendments to NYSE Rule 452 eliminated discretionary
voting for director elections, so practical implication of change is to
eliminate discretionary voting on executive compensation matters,
including shareholder advisory votes on executive compensation
and golden parachutes
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Company Action Items:
– Consider additional efforts to obtain retail shareholder votes as it
will be more difficult to obtain their votes to approve “say on pay”
and proposals related to compensation plans
– Negative shareholder advisory votes may lead to shareholder
advisory services recommending against the election of
compensation committee directors
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Compensation Clawbacks
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Act directs SEC to issue rules requiring exchanges to require that a
listed company develop and implement a clawback policy providing:
– For disclosure of the company’s policy regarding incentive-based
compensation based on financial information required to be reported
under the federal securities laws; and
– In the event of an accounting restatement due to material
noncompliance with any financial reporting requirement under the
federal securities laws, the company recovers incentive-based
compensation paid to any executive officer on the basis of the
erroneous data
 Applies to compensation paid to any current or former executive
officer at any time during the three-year period preceding the
restatement
 Includes stock options awarded as compensation
 Amount recovered must be the excess of the compensation paid
over what would have been paid based on the restated financial
information
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Compensation Clawbacks (con’t)
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Act does not set a deadline for SEC to act
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Section 304 of the Sarbanes-Oxley Act of 2002 (SOX) already
contains a clawback provision, although the standard under the Act
is stricter than the SOX standard because SOX requires that the
restatement occur “as a result of misconduct,” only applies to a
company's CEO and CFO, and is limited to a 12-month period
preceding the restatement
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Company Action Items:
– Adopt new clawback policy that complies with SEC rules, or amend
existing policy to ensure compliance with SEC rules
– Consider how to effectively apply and enforce policy once adopted or
amended
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Compensation Committee
Requirements
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SEC must act by no later than July 16, 2011 (360 days
after enactment) to issue rules to direct exchanges to
prohibit listing of any company that is not in compliance
with the requirements of the Act relating to:
– Compensation committee member independence;
– Compensation committee adviser independence; and
– Compensation committee authority and funding
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Act exempts listed companies of which more than 50%
of the voting power for the election of directors is held by
an individual, group or other company
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Compensation Committee
Independence
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Exchanges must require that all compensation
committee members be independent (similar to audit
committee members)
Exchanges must consider the following in determining
independence:
– A director’s source of compensation, including consulting,
advisory or other compensatory fees paid by the company
to the director; and
– Whether a director is “affiliated” with the company or any
affiliate or subsidiary of the company
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Compensation Committee
Independence (con’t)
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Company Action Items:
– Review current compensation committee member
independence in light of most strict potential
independence standard (i.e., audit committee standard)
– Review and revise compensation committee charter and
corporate governance principles to comply with final rules
– Review and revise D&O questionnaire to capture
information to determine independence
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Compensation Committee Adviser
Independence
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If compensation committee desires to engage
compensation consultant, independent legal counsel
or other advisers, the committee must first take into
consideration independence factors identified by the
SEC, which must include:
– The provision of other services to the company by the
adviser's firm;
– The amount of fees received from the company by the
adviser's firm as a percentage of the adviser firm's total
revenue;
– The policies and procedures of the adviser's firm that are
designed to prevent conflicts of interest;
– Any business or personal relationship of the adviser with
a member of the compensation committee; and
– Any stock of the company owned by the adviser
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Compensation Committee Adviser
Independence (con’t)
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Independence factors must be competitively neutral
among the categories of consultants, legal counsel, or
other advisers and preserve the ability of compensation
committees to retain the services of members of any
such category
Act does not require that a compensation committee
engage outside advisers, that compensation committee
advisers be independent, or that a compensation
committee follow the advice of its adviser(s)
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Compensation Committee Adviser
Independence (con’t)
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Company Action Items:
– To the extent the compensation committee has engaged
compensation advisers, review compensation committee
advisers’ independence based on factors identified in the
Act
– Consider establishing policies and procedures for the
compensation committee to follow when retaining advisers
– Review and revise compensation committee charter to
comply with final rules
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Compensation Committee Authority
and Funding
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Compensation committees must have authority to hire
compensation consultants, independent legal counsel
and other advisers
Compensation committees must be directly responsible
to appoint, compensate and oversee the work of
compensation consultants, independent legal counsel
and other advisers
Companies must provide compensation committee
appropriate funding for compensation consultants,
independent legal counsel and other advisers
Company Action Items:
– Review and revise compensation committee charter to
comply with final rules
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Proxy Statement Disclosure:
Compensation Consultants
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Act directs SEC to issue rules requiring proxy statement
disclosure of:
– Whether compensation committee retained or obtained
advice from a compensation consultant;
– Whether the consultant’s work raised any conflict of
interest; and
– If so, the nature of the conflict and how it is being
addressed
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Requirement will be effective for all annual shareholder
meetings occurring on or after July 21, 2011 (one year
after enactment)
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Proxy Statement Disclosure:
Compensation Consultants (con’t)
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SEC rules adopted in 2009 require companies to
disclose the role of compensation consultants and work
done by the consultants for the company as well as
certain conflicts of interest
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Proxy Statement Disclosure: Pay vs.
Performance
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Act directs SEC to issue rules requiring companies to include in
their annual meeting proxy statements information that shows
the relationship between executive compensation “actually paid”
and the “financial performance of the company”
– May include a graphic representation of the information required to be
disclosed
– “Actually paid” standard is different than “awarded to, earned by, or paid
to” standard applicable under current proxy rules
– In analyzing “financial performance of the company,” must take into
account any change in the value of shares of company stock and
dividends
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Act does not set a deadline for SEC to act
Time period is uncertain – possibly just prior fiscal year.
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Proxy Statement Disclosure: Pay
Disparity
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Act directs SEC to issue rules requiring disclosure in
proxy statements of:
– Median (not the average) annual “total compensation” of all
company employees (other than the CEO);
– Annual total compensation of the CEO; and
– Ratio of median employee total compensation versus CEO
total compensation
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“Total compensation” must be calculated in accordance
with the rules for Summary Compensation Table in
effect on July 20, 2010
Act does not set a deadline for SEC to act and SEC
Chairman Schapiro noted that it is unlikely that these
rules will be in place for the 2011 proxy season.
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Proxy Statement Disclosure: Pay
Disparity
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Company Action Items:
– Wait on SEC rules
– Modify disclosure controls and procedures to capture
information required by anticipated SEC rules
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Proxy Statement Disclosure:
Employee and Director Hedging
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Act directs SEC to issue rules requiring annual meeting proxy
statement disclosure regarding whether employees and directors
may purchase financial instruments designed to hedge or offset
decreases in market value of compensatory awards of equity
securities or otherwise held, directly or indirectly, by those persons
– Includes prepaid variable forward contracts, equity swaps, collars and
exchange funds
– Act requires disclosure only of policy with respect to purchasing
hedging instruments, rather than actual purchases
– Current SEC proxy rules require specific hedging transactions by
executive officers or directors to be disclosed
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Act does not set a deadline for SEC to act
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Company Action Items:
– Review and revise existing hedging policy or consider adopting hedging
policy for directors, officers and employees
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Proxy Statement Disclosure:
Chairman and CEO Structure
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Act directs SEC to issue rules requiring proxy statement
disclosure of the reasons why a company has chosen
either the same or different persons to serve as
Chairman of the Board and CEO
2009 SEC rules already require disclosure of whether
and why a company combines or separates the
positions of Chairman and CEO
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Institutional Investment Manager
Vote Disclosure
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Act requires institutional investment managers
exercising investment discretion over $100 million or
more of U.S. public company equity to report at least
annually how they voted on “say on pay” and golden
parachutes
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Other Potential Exemptions Under
the Act
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Act permits the SEC or national securities exchanges to
exempt classes of companies from the following
requirements of the Act:
– Proxy access authority;
– Shareholder advisory votes on executive compensation and
golden parachutes;
– Disclosure of investment manager votes on executive
compensation and golden parachutes; and
– Compensation committee and adviser independence
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SEC has delayed proxy access for small companies for
three years
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Immediate Action Items
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Educate directors and senior management
Revise bylaws for proxy access
Monitor SEC rulemaking
Consider compensation policies and disclosures in light
of pending rules
Be proactive in communication with large shareholders
and understand their concerns
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This presentation is provided as a service to friends and clients. This presentation
addresses new laws that will be subject to regulatory interpretation and rule-making
over the next twelve months. The information contained herein should not be
construed as legal advice.
Prepared by:
Gardner F. Davis
gdavis@foley.com
and
Michael B. Kirwan
mkirwan@foley.com
Foley & Lardner LLP
Jacksonville, FL
(904) 359-2000